Rackspace and Equinix Get Boost From Cloud Computing Partnership

Includes: DELL, EQIX, RAX
by: Paolo Gorgo

On Wednesday, Dell (NASDAQ:DELL), Equinix (NASDAQ:EQIX), and Rackspace (NYSE:RAX) announced that they joined forces to offer an OpenStack demonstration and test environment to customers who will then enjoy the ability to move cloud assets between data centers in different regions. This represents the first implementation of geographically dispersed data centers running OpenStack.

The OpenStack cloud operating system is an open-source platform that provides computers and storage. It was born thanks to a co-development by Rackspace and NASA, and is now supported by a broad number of big names, including Intel (NASDAQ:INTC), AMD, Microsoft (NASDAQ:MSFT) and Citrix (NASDAQ:CTXS).

There are many advantages to having a standardized platform, among them zero licensing cost and the capacity to build API-compatible clouds, which means portability, as the code you write for one OpenStack can be easily deployed into another.

There’s little doubt about the positive momentum enjoyed by every stock linked to cloud computing. Recent examples also include the Terremark (NASDAQ:TMRK) and Navisite (NASDAQ:NAVI) acquisitions, made by Verizon (NYSE:VZ) and Time Warner Cable (TWC) at a nice 30% plus premium.

Bespoke Investment Group created a cloud computing basket containing 13 of the stocks most commonly associated with cloud computing, and its most recent update shows that it has basically doubled since January 2010. Both Equinix and Rackspace are part of this cloud computing selection of stocks.

Before coming out with this press release, Equinix and Rackspace had already had a few occasions to discuss their cloud offering and how their services could be used to create synergy. A recent example was the William Blair & Company Technology Symposium, where Brian Lillie, Equinix’s Chief Information Officer and Jason Luce, Rackspace' s vice president, finance, both participated in a session entitled “Building the Cloud: What Infrastructure and Services Are Necessary to Provide On-Demand, Outsourced IT Environments."

The market liked the announcement, and Rackspace closed at an all-time high of $43.01 on Wednesday, scoring a +8.31% during the session. Equinix also enjoyed a positive 4.44% increase, while Dell was the only negative stock of the three vendors.

The market reaction is always difficult to analyze in a short period of time; however, this time it might make sense that the only two positive stocks were the companies that will most likely benefit from the move to cloud computing in terms of expected growth, which is expected to be in the two-digit range for both Equinix and Rackspace. Rackspace guided for a 24% increase in revenues this year, and Equinix has just ended 2010 scoring a 21% organic growth and a 38% revenue increase, including the acquisition of Switch and Data made during last year.

The demo environment will be initially deployed in three data centers: The Equinix facilities in Silicon Valley, Calif., and Ashburn, Va. (Washington, D.C. metro), and the Rackspace data center in Chicago. The companies plan to collaborate on additional demo environments in Equinix data centers in Europe and Asia in the second quarter of 2011.

The choice of Silicon Valley and Ashburn was not made by chance: In both markets, which also represent the most important East and West coast landing points for Asian and European network providers getting into the U.S., Equinix represents the best and most connected network neutral hub, thus facilitating customers finding the best connectivity options for their needs.

Equinix is the most important peering point in the U.S., where most ISPs and network providers meet to exchange traffic and connect to their customers. Rackspace itself is deployed into Equinix's data centers in Ashburn, Chicago, Dallas, and St. Louis in the U.S., and Hong Kong and London in Asia and Europe.

The market will soon realize that a dispersed and well-connected data center network represents a key infrastructure need for cloud computing deployments. Equinix, as the owner of the best network neutral facilities in the world, may end up finding itself in the position of the guy selling shovels during the gold rush.

Disclosure: I am long EQIX.